Apple Q2: The Mac Gets The Job Done (AAPL)

Apple needed its Mac business to drive growth during the March quarter, and it came through: The company sold 2.29 million Macs last quarter, up 51% year-over-year and above the 2.0 million they needed to sell to impress investors.

Overall, Apple (AAPL) reported $7.51 billion in March quarter sales, up 43% year-over-year and beating both the Street's $6.95 billion consensus and whispers up to $7.2 billion.

Less impressive: The company's 32.9% March quarter gross margin, down from 34.7% the prior quarter. Apple blamed most of the decline on slower software sales, the iPod shuffle price cut, and other international price cuts.

Apple also guided June quarter profit to $1.00 per share, less than the $1.10 analysts were expecting. Apple is known to guide conservatively, though, so this shouldn't be too much of a surprise. Shares are drifting between 0-1% gains and losses in after-hours trading.

5:12 Apple retail: 74% up y/y. 458,000 Macs sold, up 68% y/y. Opened 4 stores during quarter to end with 208. Avg rev per store $7.1 million, compared to $4.8 million a year ago. Operating profit doubled to $334 million.

5:14 Opening about 45 stores during fiscal 2008. Comfortable with investment. Total company GM 32.9%, stronger than guidance due to components, weaker dollar.

5:17 Some negatives for gross margin? What gives you confidence of 33% next quarter? DRAM and NAND pricing hit low levels during March quarter. Expect to remain favorable.

5:19 Did lower priced shuffles cause problem? Peter: We expected gross margin to decline by about 2.7%. Exceeded by 90 bps. Better than expected results thanks to favorable commodity environment, etc. Change in Leopard in other Apple software accounted for 80% of gross margin decline. Other factors: Shuffle price change, International price reductions, higher mix of iTunes, which has lower gross margin, and sequential decline of revenue. Somewhat offset by favorable component pricing, which was ahead of guidance.

5:21 iPhone: Less availability. Widely expecting new products. Anything you could say that you could grow that sequentially? Anything you're worried about in terms of shortages? Tim: Confident in hitting 10 million for the year. Shortages: Expected iPhone to decline more than it did, so we really beat our unit expectations. Started to experience some stock out. At this point, inventory currently low in stores and channel. Believe the reason more phones being bought in US to be unlocked, which remains a significant number. Can't clarify how many. Very difficult to come up with very precise estimate. Continues to be significant. View continues to be that this is a proxy for the worldwide demand of the phone and our focus is very much on roling out to more geographies. More European countries, entering Asia later in the year.

5:23 Direct sales 53%, up from 49% a year ago. Ended with 400 Best Buy stores, targeting 600 in the summer. Rollout is going extremely well. Education: Can you delineate between student programs and institution? Numbers that Peter quoted -- up 35% -- both categories strong. This is a big K-12 quarter.

5:24 Passed Dell last year in portable edu spending. Always worried about budgets but results we've seen to date... we have not seen any issue today.

5:25 Why going to delay revenue recognition on iPhone 2.0? Doing this because we announced specific new features that will be included for free. Will delay revenue recognition on phones sold between March 6 and day we deliver the software.

5:30 Intend to deliver iPhone 2.0 in late June. Included delay of revenue recognition in 33%.

5:31 Guiding to $7.2 billion for Q3. Factor several things into thinking: Mac channel inventory increased about 60,000 thanks to Macbook Air launch and greater sales. iPhone won't be recognized until late June. Sequential decrease in iPod expected. Full quarter impact of iPod shuffle and international price reductions.

5:32 More chatter about gross margin. International store openings will be greater this year than last. 27 of 208 were outside U.S. Increased store opening forecast to 45 stores this year.

5:35 Leopard revs in Dec quarter was $170 million, and they were just over $40 million in March quarter. By far the best selling release in history. Also iLife and iWork in third quarter... impact of sequential gross margin decline a little bigger.

5:38 Why will pricing be favorable still? Doesn't mean will go later... envision it trading in a fairly narrow trading range and not increasing that much as we head into the quarter.

5:40 Getting a little testy!

5:43 Nope, not charging for iPhone 2.0 software.

5:44 Not going to forecast exact in-stock levels; have factored current thinking of supply/demand in guidance.

5:45 Who bears cost on iPhone price cuts in Europe? Carrier partners are free to price iPhone as low as they wish; wouldn't comment on specific commercial agreements between Apple and carriers. 3G??? We don't comment on new products! Where seeing strength in channel? Comments in linearity? Strength in all geos. In Americas mac up 52%, Europe 48%, Japan 47%. Consumer appears to be strong. Pro business had nice pickup. Mac Pro sold more units.

5:47 Started shipping Macbook Air late in January, a lot of shipments went out in March. By end of March were at near a supply-demand balance on it. iPhone linearity: Outstripped supply toward the end of the quarter because we sold more than we had expected. Thought there would be more of a sequential decline there than there was.

5:50 Other big reasons for gross margin decline than software? Hard to do y/y gross margin comps because different points in product cycles, commodity cycles. Will stick to sequential comments.

5:51 Comments on P.A. Semi? Nope, no comment on purpose or plans.

5:53 Really hard to estimate unlocked iPhones and we don't want to throw a number out. Unlocking is occurring, and it's significant. Clear interest in demand globally for the iPhone. We're hearing reports of iPhones being used in many countries. Confidence in goal of selling 10 million in 2008.

5:54 Why more supply in Europe than U.S.? Noticeably different demand profile in U.S. versus Europe? Why couldn't you ship phones from Europe to U.S.? Stockouts were occurring in own stores, believe that stores more succeptible to people buying multiple units, then unlocking and exporting. Currently, inventory low in both stores and channel. Also the case in European channel? Don't want to be specific. In aggregate, Europe and U.S. are both low. Was channel also low at end of quarter? Why not better able to allocate? Once shipped and designated, ability to move them from carrier to carrier is low. Some cases with imbalance. Major point is that we sold more than we thought we would; today inventory low in Europe and US.

5:56 No comment on iPhone demand in Europe.

5:59 Any demos on Macbook Air purchasers? Appealing to all sorts of people from college profs to students to people who travel a lot. Caniballization factor very low.

The big question: How many Macs did Apple sell? The Street expects sales of 2.0 million, but we've seen estimates as high as 2.2 million (RBC's Mike Abramsky) and whisper numbers up to 2.3 million. Anything
below 2.0 million would be disappointing. But anything over 2.1 million
Macs would be "a significant positive," says Piper Jaffray analyst Gene
Munster. Selling 2.1 million Macs represents 38% year-over-year growth,
significantly higher than the average 26% y/y Q3 growth the last three
years.

Also critical: guidance. In January, when Apple demolished its Q1 numbers, the stock still tanked 11% after-hours, thanks in part to weaker-than-expected guidance.
The Street expects Apple to guide to $7.15 billion of revenue and $1.10
EPS for Q3, but Apple is known for conservative guidance, often guiding
below consensus. Anything below $7 billion/$1.05 could be
disappointing, according to AmTech's Shaw Wu, who downgraded the stock
yesterday.

iPod and iPhone unit sales will be interesting, but not essential.
Investors already know that iPod growth has slowed -- and Apple could
easily sell fewer iPods during Q2 2008 than it did in Q2 2007. And
while the iPhone makes for great conversation, it's still too small to
make a dent in Apple's quarterly results. It will, however, become more
important later this year (when the 3G version comes out) and next year.

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Apple Q2: The Mac Gets The Job Done (AAPL)

Apple needed its Mac business to drive growth during the March quarter, and it came through: The company sold 2.29 million Macs last quarter, up 51% year-over-year. Overall revenue beat the Street, but gross margins were down, and June profit guidance was below expectations.